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The Clergy Housing Allowance

Warning: this is a very “inside baseball” kind of piece, relevant only to clergy and those interested in issues of clergy compensation.

On Friday, a Federal District Court judge, Barbara Crabb, ruled that the housing allowance afforded to clergy is unconstitutional. This set off a long discussion in the United Methodist Clergy Facebook group, but I got a chance to read through the decision, and I thought I’d share my thoughts on what this decision means and how it might impact the United Methodist Church and other denominations.You can read Judge Crabb’s full decision here.

The decision rested on a few principles that appeals courts will need to deal with. The first is the issue of “standing” – who can sue in a case like this? This case was initially dismissed because the plaintiffs, the Freedom From Religion Foundation, are not affected by the law – they did not suffer injury by not having a housing allowance. But, the judge allowed a broader understanding of this, since to force them to try to claim the housing allowance and then get rejected by the IRS would needlessly add time to the lawsuit. This argument may get tossed on appeal – the FFRF sued in this same court with this same judge regarding the National Day of Prayer, and the judge’s argument that they did have standing was tossed by the Seventh Circuit Court of Appeals. But, assuming the argument that they do have standing to bring the lawsuit remains (Judge Crabb relies on a better Supreme Court precedent specifically addressing a religious tax exemption in this case), the merits of this case do not bode well for the future of the housing allowance.

The central argument is that this respects the establishment of religion, a violation of the First Amendment. Under “the Lemon Test,” a law respects the establishment of religion if it 1) has no secular purpose, 2) its primary effect advances religion, or 3) it fosters an excessive entanglement with religion. This case argued that the housing allowance violates 1 and 2. In short, it is a housing arrangement only provided for clergy, who by nature must be religious, even when it is religion that can be non-theistic like Unitarian Universalism, and so it has no secular purpose and advances religion. The government (the defendants in this case) argued that the law is actually necessary in order to prevent excessive entanglement with religion.

To understand this argument, we need to look at the history of the housing allowance. When the income tax was first passed, one of the things that was put in place was an idea that you shouldn’t have to pay tax on the rental value of housing provided for the convenience of an employer. So, for example, if you are the live-in caretaker of a camp, you don’t have to pay the IRS something on the value of the “income” you receive in the form of free housing. It’s not cash you took in, and you really didn’t have much of a choice but to live there in accepting the job. This doctrine was naturally expanded to church-owned parsonages, but there is a multi-factor test to determine whether housing is for the benefit of the employer (and under this test, a parsonage right on the main church property would qualify, but a parsonage a few blocks away likely would not). Congress in 1921 decided that this was prying too much into the business of churches to apply this test, and so exempted parsonages entirely, without needing to substantiate whose benefit it is for. Later, in 1954, the code was amended to also include cash housing allowances, on the grounds that to only exempt parsonages was to discriminate in favor of certain church polities and of more established churches.

However, the cash housing allowance becomes tenuous when you realize that this concept of trying to stop discrimination against smaller, less-established religions only applies to religion and doesn’t serve a secular purpose or have a secular counterpart law, and so likely violates the establishment clause of the first amendment. A “less-established” camp in the example above which hasn’t been able to afford to build a caretaker’s residence can’t pay its employees a cash housing allowance tax-free, even if its competitor has well-established housing arrangements for its employees.

All of this to say, I think Judge Crabb is right, but I am not a lawyer or a judge, so she could get overturned on appeal. The cash housing allowance is a benefit afforded only to religion, and it could very likely fail constitutional muster when all is said and done. So, what does this mean for the United Methodist Church?

Well, for that answer, we need to return to the case. One important thing to note is that while the cash housing allowance was ruled unconstitutional, the exemption for parsonages was not. It was not considered because of the standing issues I notes above, and this one is harder to get around – the plaintiffs don’t live in employer-provided housing, and so it really doesn’t affect them. However, for the reasons I explained above as to the origin of the housing allowance, the parsonage exemption has a much stronger line of reasoning supporting it: to apply the complex employer-provided housing test currently in place would lead to excessive government entanglement in religion. So, for purposes of this post, I’m going to assume that the parsonage exemption is legal and will be upheld in the long-run, and the housing allowance is not and will not be upheld in the long-run.

The United Methodist Church is an itinerant ministry. And because of this, I believe (though I haven’t been able to find any hard data to confirm this) that we likely own more parsonages per capita than any other Protestant denomination. Most other denominations assume the pastor will be there for a while, and the benefits of home ownership are the same as anyone else who accepts a job assuming they will be there for a while. United Methodist clergy are appointed for one year a time, and though we may stay for a while longer than that, we can be moved at any time. Since it takes about five years to really start to build any equity in a home, it can be a risky move for a United Methodist pastor to buy a home, because he or she can be moved in a few years and then take a big financial bath in the process if he or she bought a home. So, in many cases, it makes more sense for the pastor to live in a parsonage. However, the consistent growth of real estate values through much of the 2000s led many pastors and conferences to encourage use of the housing allowance so that pastors could buy houses and benefit from the growth of equity in their home. This has slowed down since the real estate bust, but there still seems to be a sense that the housing allowance is financially more beneficial to the clergy person (even though this may not really be the case for a shorter appointment).

However, if this case stands, I think we might see a significant shift back to the parsonage. Without the tax-free housing allowance, the risk for a UM pastor buying a house becomes that much greater. There’s no way to get around it: should this stand, it will cost clergy money – we will pay more in taxes if we don’t live in a parsonage. But similarly educated professionals like teachers also have to pay this same amount of taxes because they’ve never been afforded a housing benefit. As hard as it is, we’ve been blessed with this tax benefit for many years, and now we will need to begin living within the same constraints as our laity.

It might even be positive for our polity in some ways. First, it will eliminate some of the confusion our laity have in how we are compensated. One of the biggest challenges in setting clergy compensation is that it is very different from compensation of laity. I know pastors who have been accused of being tax cheats because they use their housing allowance to its fullest (and perfectly legal) extent. If we can’t get a tax-free housing allowance, it’s much easier to do an apples-to-apples comparison. Second, if parsonages were back in vogue, it could make clergy moves easier. The move process becomes that much more complicated when multiple clergy-owned houses are in the mix – in our polity, an appointment change happens in such a way that we may preach a farewell sermon on one Sunday, move, and then the following Sunday, preach our first service at a new church. Buying and selling a house in the middle of all of that can really limit our effectiveness during the transition.

Of course, it will also bring challenges, the biggest of which is our retired clergy, who made plans based on their retirement income coming in the form of tax-free housing allowance (All annual conferences declare retiree pension payments to be a housing allowance). If the ruling stands, clergy today will know that they need to plan for retirement housing. Retired clergy don’t have the time to change their financial planning, and are the least likely to be able to afford this. This will be something we have to address as a denomination. And we as clergy who have enjoyed the preferential tax treatment will have to tighten our belts (I will be among those who would need to tighten my belt – live under a housing allowance and so have greatly benefited from the tax savings), but we need to remember that our laity have had to live under these rules for much longer than we have.

Bottom line, I don’t think our tax-free housing allowance will last much longer. We’ve got to learn how to live off of the same rules as our laity. Which brings me to a final point – the Social Security issue. Clergy are considered self-employed for Social Security purposes, which means we have to pay (currently) 15.3% of our income (including housing allowance or fair rental value of paronsage) toward Social Security. I think it’s a very logical argument to make that treating clergy as self-employed rather than employees would also be just as problematic as the housing allowance issue (but that’s a different part of the tax code, and so would require a different lawsuit), but I would also argue that it really wouldn’t make that much of a difference. If we were employees, our church would have to pay 7.65%, and we would have 7.65% taken out of our paychecks in FICA like other employees, and so the total paid, 15.3%, wouldn’t change. But more than likely, if our church had to pay that cost, our compensation would likely decrease to cover the cost – not many churches can afford to give a 7.65% raise to all of its clergy, and so a switch to employee status would just change the bookkeeping, not our take-home pay.